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ICAEW calls on auditors to vet banks’ capital numbers

AUDITORS who vet the accounts of the UK’s biggest banks could add credibility to capital numbers by expanding their remit to include oversight on banks’ capital ratios and risk-weighted assets calculations, the ICAEW has said.

In a discussion paper issued by the institute as part of a process of designing an assurance framework for capital information, the ICAEW has suggested that bank stakeholders would benefit from a transparent assurance process.

The ICAEW was asked to consider how to develop a framework by the Prudential Regulation Authority to show how independent scrutiny could add credibility to banks’ capital numbers. Capital ratios indicate a bank’s safety and soundness and are produced alongside financial information, but are not audited in the same way.

“Capital ratios are probably the most looked-at numbers that banks produce – and yet they are not audited. We need a consistent way to deliver this that meets different users’ various needs. We want to know how far assurance should go and are now asking stakeholders: what assurance do you need?” said Iain Coke, head of ICAEW’s Financial Services Faculty.

Andrew Bailey, chief executive of the PRA and deputy governor of the Bank of England, said: “We need capital ratios to be credible. We are interested in understanding whether audit of these measures could help contribute to a process of assurance that enhances their credibility.”

Capital questions

The leading accountancy firms have so far failed to adequately vet the accounts of the UK’s most important financial institutions following the financial crisis. In 2013, the FRC launched a formal review of bank audits to find out why progress in improving their quality has been so slow. In particular, the review focused on the testing of loan loss provisions and general IT controls.

That review of 13 banks and building society audits, completed in December, found that two audits required “significant improvements” ten audits were deemed as either good or requiring limited improvements.

The ultimate aim of the PRA project is to design an assurance framework for capital information. The first step is to discuss the nature and extent of the assurance to be provided. Responses are invited by 16 October 2015.

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